Tax Law Drafting Samples: VAT

Including Hypothetical Tax Laws

June 16, 2003, revised January 24, 2006

The IMF Legal Department has prepared a series of four texts of value added taxes. All are credit-invoice VATs that are imposed on the destination principle, the kind used almost universally around the world. The VAT relies on invoices issued by the seller to verify the sales for the seller and the credit for tax on purchases by the buyer. The destination principle VAT imposes tax on imports and provides for the recovery of VAT on exports. One text is a VAT drafted for the hypothetical country of "Fantasia," in the style of tax codes found in certain countries in eastern Europe and central Asia. The other three, following the drafting style used in the British Commonwealth, include a value added tax drafted for the hypothetical Commonwealth of Vatopia and Commonwealth of Republica, and most recently the Commonwealth of New Vatopia.

Where there are two or more approaches to the treatment of transactions or the imposition of penalties, in some cases, New Vatopia or Vatopia includes one approach and Republica the other, or New Vatopia or Republica includes one approach and Vatopia the other. For example, New Vatopia and Vatopia require all registered persons to use the invoice method of reporting tax on sales and tax on purchases, while Republica provides for the cash method for some small businesses. Vatopia includes penalties within the provisions imposing obligations (for example, penalties for failure to register are included in the rules governing registration), while New Vatopia and Republica include penalties in separate provisions. The four texts contain a wide variety of tax bases and policy choices. The broad differences are discussed below. The fact that particular policy choices have been reflected in the drafts is not intended to represent an endorsement of any of these policies, either as a general matter or for particular countries. The primary intention is to furnish examples of draft statutory language and to illustrate the matters to be covered by a draft law. Drafts prepared for particular countries can be expected to depart from these examples because of considerations of local drafting style, the legislative history of the tax laws in the country in question, and the policy choices made by the authorities.

Numerous individuals contributed to the preparation of the Vatopia, Republica and Fantasia drafts; the final drafts were coordinated by Victor Thuronyi, Senior Counsel (Taxation), IMF Legal Department. New Vatopia, a revision of Vatopia, was prepared by Alan Schenk. It expands the alternative methods of treating particular items and benefits from drafting done as part of IMF technical assistance work in the Caribbean.

Note

These drafting samples have not been considered by the IMF Executive Board and, hence, are not official documents of the IMF; they should not be attributed to the IMF as an institution. They have the same status as working papers produced by the staff.

The Fantasia Value Added Tax Law and its Explanatory Notes were prepared by a number of people working for the IMF Legal Department. It draws on the experience of the Legal Department in assisting in the drafting of value added tax laws for a number of countries of the former Soviet Union and in Eastern Europe (it is an adaptation of the VAT section of the Taxastan sample code, to be found elsewhere on this website). The style of Fantasia is quite different from the other sample value added tax texts. This short text incorporates or relies on income tax and customs rules, and delegates broad powers to the Minister to fill-in the gaps by regulations. It is designed for a nation that has modern income tax and customs laws or tax legislation based on a well-developed revenue authority. Regulations are necessary in many areas, including the allocation of input tax credits, transitional rules, and explanations of the scope of the supplies that are exempt from tax.

This sample VAT Act is based on the Legal Department's work in several countries in southern Africa (including Namibia, Botswana, and Ethiopia). The principal author is Alan Schenk (Professor of Law, Wayne State University, and technical adviser, Legal Department, IMF). Vatopia has the broadest tax base of the various samples, with the fewest supplies exempt from tax or zero-rated. This sample contains a number of provisions not included in Republica or Fantasia. The Vatopia VAT is imposed on gambling, provides relief for bad debts, provides notional credits for second-hand goods acquired in nontaxable transactions for resale, and permits some firms to apply for separate reporting by branches. Vatopia provides more detailed statutory guidance on the scope of transactions entitled to zero rating. Vatopia includes specific rules covering a wider variety of supplies. As a result, Vatopia provides more extensive timing and valuation rules for these supplies. Vatopia provides for quicker refunds for exporters and a mechanism for the Minister to authorize tax refunds to travellers exporting goods in their accompanied baggage. Vatopia provides the structure for the Minister to tax more financial services, such as fee-based services taxed in a growing number of countries.

This sample Republica VAT Act and Explanatory Notes are based on the Legal Department's work in Uganda, Lesotho, The Gambia and Tonga. The principal authors are two technical advisers to the IMF Legal Department, Lee Burns of the University of Sydney Faculty of Law, and Alan Schenk of Wayne State University Law School. Compared with Vatopia, Republica classifies fewer transactions as supplies of goods or services and therefore contains fewer rules governing the time and value of specific supplies. Republica limits the administrative decisions by the Commissioner that are subject to challenge through the objection procedure in the Act. Republica has a narrower tax base as a result of a broader range of exemptions.

This sample New Vatopia Act is an updated version of Vatopia that adds in footnotes various alternatives to the rules included in the Act. New Vatopia also edits and clarifies many of the sections of the Vatopia VAT. The sections are rearranged to conform more closely to modern VAT structures. New Vatopia adds some new sections, including one that authorizes the bringing of criminal charges (including a time limit to bring charges). It adds rules for promoters of public entertainment, especially when the entertainment involves foreign entertainers who are in the country for a limited period of time. As mentioned above, a major difference between Vatopia and New Vatopia is that the latter adds alternatives to the rules in the Act. For example, see the footnotes to:

1. section 5 discussing an alternative way to treat sales by the State and local authorities;

2. section 12 discussing the new European Union rules on the place of supply of goods and services;

3. section 27 discussing an alternative way to value sales of second-hand goods;

4. section 32 discussing the option to provide for the issuance of tax invoices only in the case of taxable sales to registered purchasers;

5. Schedule I and II discussing the reliance on regulations instead of the schedules to define the scope of zero-rated and exempt supplies; and